Validea's Guru Investor Blog

The best scenario for investors is steady and low levels of inflation that ward off deflation but also discourage central banks from hiking rates too rapidly, says a Wall Street Journal article from last month.

So far, the article asserts, “Trumpflation” has been embraced by deflation-fearing investors—but shareholders should be “keeping a watchful eye on consumer prices, as they often rise much faster than anticipated.”

Jason Trennert, chief investment strategist at Strategas Research Partners, says, “If inflation gets to 4%, the Fed’s really behind the curve,” but adds, “The good news is that we probably have some time before we get to 4%.” [The article notes that consumer-price inflation in the U.S. is currently just above 2%. New figures will be released on February 15th.]

If inflation picks up speed, says the article, “history suggests that the price/earnings ratio will suffer, as the sweet spot for valuations has been with inflation in the range of 1% to 3%, and they have on average fallen sharply with inflation above 4%.” Such a drop in valuation, it argues, “will more than offset the rise in earnings from a stronger economy.”